BlackBerry’s long, hard slog back to respectability

BlackBerry’s fourth-quarter earnings were markedly better than expected, with its loss of $0.08 per share a share significantly better than the consensus estimate of a $0.67 loss per share. At first glance, that would be a huge improvement, but when you drill down further, the company still has a long way to go towards getting anywhere close to where it once was in the mid-2000s.

For the fourth quarter, BlackBerry only generated $976 million in revenue, a far cry from the $1.13 billion analysts were expecting. To make matters worse, that’s down 18% sequentially, and 64% year over year. Those aren’t exactly numbers that would make anyone brag about. To make matters worse, the company is still spending cash, having drawn down $500 million in cash during the quarter. The company ended the quarter with $2.7 billion in cash, which makes up more than half of the company’s market cap (roughly $4.8 billion).

Gross margins during the quarter hit 56.7%, as the average selling price (ASP) of the phones continued to improve by hitting $277.69 in the quarter, up from $251.16 in the third quarter of fiscal 2014. Service revenue of $547 million is lower than the previous quarter’s $632 million, a 13.5% quarter-over-quarter decrease. The decrease is in line with management’s guidance although better than the mid-teens percentage decline expected.

Wall Street is reacting positively to the numbers, sending shares up around 2.2% in early Friday trading, to around $9.25. That’s a far cry from the $200+ share price in 2007. The smartphone game has been taken over by Apple with the iPhone, and a wave of Google Android devices, the latest major one being the HTC One M8.

CEO John Chen is something of a turnaround expert, having turned around Sybase before selling it to SAP a few years ago. Since taking over for former CEO Thorsten Heins in late 2013, Chen has focused on cutting costs, selling assets (BlackBerry recently announced the sale of its Waterloo, Ontario headquarters), and he continues to look to monetize assets such as BBM, which ended the quarter with 115 million users, and 85 million monthly active users (MAUs), up from 80 million MAUs the prior quarter.

“I am very pleased with our progress and execution in fiscal Q4 against the strategy we laid out three months ago,” Chen said in the press release. “We have significantly streamlined operations, allowing us to reach our expense reduction target one quarter ahead of schedule. BlackBerry is on sounder financial footing today with a path to returning to growth and profitability.”

It’ll be a long time before BlackBerry returns to profitability, but Chen is trying his hardest to get there. The company only recognized revenue on 1.3 million smartphones during the quarter, compared to 1.9 million in the prior quarter. Approximately 3.4 million smartphones were sold through to end customers, but that only tells half the story. The real focus is that of those 3.4 million, 2.3 million were BlackBerry 7 devices, which is not a good sign for the company’s new operating system, BlackBerry 10.

BlackBerry appears to be returning to its roots, as the company’s subscriber base shrinks to a small, hardcore base. On the company’s earnings call, BlackBerry said it will bring three high-end devices over the next 18 months, that will be “keyboard centric.” The company is working with Foxconn to produce phones, so it will be interesting to see whether these phones are outsourced or worked on in-house.

Waterloo, Ontario-based BlackBerry is still in major turnaround mode, and likely will continue to get smaller, before it gets bigger. The company said that it expects to be break even on a cash flow basis by the end of 2015, though that’s still a long way from now, and the company’s subscriber base may well continue to shrink.

The company’s keys to its feature will be the QNX platform, and as it relates to in-car entertainment, as well as BBM, and whether that can truly be a disruptive force in messaging, the way WhatsApp, Line, Kik, and others have become. Following the $19 billion acquisition announcement of WhatsApp by Facebook, Chen said it was too early for BlackBerry to think about getting their $19 billion, but it’s clearly on Chen’s mind.

Blackberry will never be the the dominant company it was in the mid-2000s, not with a market share percentage of 1.7% in the fourth quarter of 2013, according to research firm IDC. Yet, Chen and his executive team are working to turn the company around, stop it from bleeding cash, and make it a viable entity in enterprise, messaging and security. The only question remains is whether it remains independent, or whether it tries to sell itself… again.